Engineering economic growth: Halifax edition

Of the dozen or so Tweets/emails I have seen regarding the engineering firm that is setting up 400 jobs in Halifax, most of them I either disagree with or have a slightly more nuanced view. This is one of those cases where many folks who share most of my views disagree with me. So, let’s agree to disagree agreeably.

Here’s what the themes are:

1. “Using payroll rebates as a job creation tool in a field that is already short on talent makes no sense whatsoever.”

If we only focused on sectors where there is a labour surplus, we would take away 95% of the opportunities. In addition, most of the labour surpluses in the Maritimes are at the low end of the wage scale. If a sector is ‘short on talent’ we need to know why and take rigorous steps to rectify it. If we stopped focusing on highly skilled sector development because of a tight labour market, it would be a sad day indeed. We certainly shouldn’t be focusing on shipbuilding in Halifax – there is a shortage of skilled workers in that area too. Maybe we should be looking at immigration as one way to fill the talent shortage. This firm will not be hiring 400 people tomorrow. Put a recruitment strategy in place now.

2. We shouldn’t give payroll rates to ‘one’ engineering firm and not the ‘other’.

This too is a strangely recurring theme – even among people that are very knowledgeable about economic development. The firm setting up in Halifax will be exporting its services to Western Canada. That is not the same at all as incentivizing local competition. If you have five engineering firms in a local market and you give one an ‘incentive’ you have unlevelled the playing field. If a firm comes in and is totally exporting services – that has no impact on the local market (except on the aforementioned labour pool). Just about every engineering firm in the Maritimes that has taken on international work or R&D projects (not competiting in the local market) has received some form of government assistance.

3. $11.4 million is an outrageous amount of incentive.

Maybe,but that’s a subjective call. These types of incentives usually run around 3-4% of payroll – or a fraction of the +/- 20% effective tax rate on that payroll (income, HST, etc.). The rate may be higher because these are higher end jobs – I don’t know the specifics. Ultimately, many people find these types of incentives offensive. That’s a perfectly reasonable position but as I have stated many times before just about every single province and state across North America offers these types of incentives. Some use tax incentives (a rebate on your taxes owed) which is – financially the same thing as a payroll rebate – where money is only paid out after the payroll (i.e. the taxes on that payroll) are paid. Other jurisdictions use royalty breaks/rebates – which are financially the same as a payroll rebate – you only get them after you generate the revenue. Others use special energy rates (similar to payroll rebates) and other types of incentives. Increasingly jurisdictions are using unfront loans – this has always been the case in Atlantic Canada but many other jurisdictions are finding themselves short of growth capital for SMEs and are putting public financing models in place.

In the end, I implore you not to take a kind of NIMBYism to economic development. I’m an engineering firm so don’t do anything to rock my boat – fine if you target ICT or manufacturing – but I am happy with the status quo in my sector. I’m an ICT firm – don’t do anything to rock my boat – I’m happy with the status quo. I’m a film production company – don’t rock my boat by bringing in other firms. I’m a forest products firm – don’t rock my boat.

In the end, we need to grow sectors such as ICT, professional services, manufacturing, etc. if we want to have enough tax revenue to pay for our public services and infrastructure. We are not doing that now and we are heading for a serious problem which will negatively impact on all of us.

This is actually a tough post to write as many of the critics of this deal (and others like it) are friends of mine or at least folks with a common view of the world. When something like this happens, they worry about the negative impacts on their industry – the labour pool, upward wage costs, etc. and react negatively. I’d like to see Halifax engineering firms embrace this kind of project and work with government and educational institutions to address the labour challenges. But if we cut all economic development – except that for which everyone is comfortable – we would end up with, well, something that looks alot like what has happened in Atlantic Canada for the past 50 years. None of the engineering or ICT firms cared about ‘call centres’ but when you start to attract firms into their sectors – that old NIMBYistic view of the world comes in.

I welcome comments and full throated disagreement but as is the rule on this blog – nothing with personal insults or bad language will be posted.

6 Responses to Engineering economic growth: Halifax edition

David,
I must disagree with you on wage subsidies. Subsidies to incoming firms over existing firms does create an uneven playing field. Your point number two makes the case based on their export focus. Do you know how many Atlantic engineering firms export their services to Alberta? Hint if you don’t have an answer, you can’t make the assumption that the assistance offered will not be used against them in those export markets. Your other point is that once established here the incoming firm will take on local business especially if there is a downturn. The unfolding situation in Alberta demonstrates, in my opinion, that their boom bust cycles are getting ever shorter.
If 11 years with ACOA taught me anything, it is that assistance directed unevenly distorts the market place and if the cost of a program has to include spending on firms that don’t need assistance (like a generally applied tax reduction) it is an expensive way to ge incremental activity. I agree we need to invest in economic development, but this is not the way to do it.
Glad to see you stimulating the debate as usual!

All very valid issues and arguments – but let’s throw in another – this project may result in ‘headhunting’ from area firms and make it difficult for the locally based firms to retain and attract talent. It may be a more valid subsidy if it brings a net 400 new engineers to the region – but I fear that may not be the case.
NSBI may be more helpful if it could remove barriers to immigration – such as negotiating with the federal govt to change rules so foreign engineering students studying here can remain after graduation.
The Projex business model is a good one – based in part on the serious shortage of engineers in AB. Currently certain of the EPC global majors are sub’ing this work internally to their offices in Malaysia and India. Other Atlantic offices are providing support in this sector – such as Stantec.
One more issue – is NSBI just piggybacking here? This project has been in the works for quite a while. It may well have been set up without any government assistance. Is this a case (as we see in NB) where the government bought their way into the announcement when it would have gone ahead anyway?

I really can’t see how subsidizing one firms hiring over another is good economic development? It’s an uneven playing field when attracting talent. Will it drive up wages? Perhaps, and the brunt of that increase will fall disproportionally on the unsubsidized firms.

And if you think the announcement of a all that shipbuilding in Halifax is not a big part of the move to open an office, I think you are fooling yourself.

Everybody loves the level playing field – even if there are only a couple of people playing on it because they don’t want anyone else in the game. Payroll rebates are usually around 5% of payroll. The wage spread in Halifax for various engineering jobs can be as high as 40% (i.e. the difference the same type of engineer will earn depending on where they work). You really think 5% is going to dramatically shift the playing field?

Then why offer it David? Why would it be an incentive if it didn’t have some sort of competitive benefit? You are saying that it is not a big deal, yet in the same post you say we are in competition with others on offering incentives, so essentially it’s a necessity.

There must be a competitive reason they chose Halifax, and those incentives have a value and give advantage, even 5%, that other firms don’t enjoy. I know if I was a tax paying firm in Nova Scotia, I wouldn’t be too happy with my tax dollars subsidizing a competitor.

In the end, it’s a good thing for our engineering schools, and keeps lots in the Atlantic Region. The greater good may be served in the end, but it’s still not fair to existing firms, in my humble opinion.

You are still not quite understanding the point of this type of incentive. It is not about subsidization of operations. It’s initial support in the first few years to help the new firm with recruitment, training, relocation and other costs. These are costs associated with transition to a new facility in a new market. If any company is choosing Halifax because of a small incentive, they are making a huge mistake. The total value of the payroll rebate for this firm will likely only be about 2% – 2.5% of total operating costs over the five year period (assuming my 5% payroll rebate level is correct – we don’t know this percentage from the release).